In years prior to 2020, owner-only businesses had to establish / adopt the self-directed solo 401k by their business year end which was December 31 for most businesses.
This all changed for the better, however, for future tax years starting with 2020 due to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is part of the Further Consolidated Appropriations Act, 2020 (FCAA) and President Trump made law in late December 2019. Thanks to the new law, owner-only employers can now adopt the solo 401k plan by their business tax return due date plus business tax return extensions. Basically, the solo 401k plan establishment deadline is now based on the business tax return due date instead of the business tax year end. Note that a business’ tax filing deadline depends on the business type (e.g., sole proprietorship, partnership, LLC, S-corporation, or C-corporation).
IMPOTRANT NOTE FOR THOSE WHO WANT TO MAKE 2020 CONTRIBUTIONS:
While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, business owners had to setup/adopt the solo 401k plan by 12/31/2020 in order to qualify to make tax year 2020 employee contributions (i.e., Roth, employee pretax, and voluntary after-tax) in 2021 by the business tax return plus extension.
Essentially, for making tax year 2020 employer profit sharing contributions in 2021 by the business tax return including extension the SECURE Act only extended the adoption due date to 2021. This means that those who did not establish the solo 401k plan by December 31, 2020 will not be able to make employee contributions in 2021 for the 2020 tax year.
Entity Type is a Sole Proprietorship or C-corporation
For example, if your self-employed business entity type is a sole proprietorship or C-corporation, and you want to establish a solo 401k plan for the 2020 tax year, you can wait to open the solo 401k plan by October 15, 2021.
Entity Type is a Partnership or S-corporation
If your self-employed business is a partnership or S-corporation, the 2020 solo 401k plan establishment deadline is September 15, 2021.
The following chart outlines the year 2020 solo 401k establishment deadline by entity type and tax status:
The Reason for the Change
The purpose of this extension to open the solo 401k plan is to give owner-only businesses more time to determine if a solo 401k plan is right form them. The increased deadline to open a solo 401k plan now aligns with the SEP IRA establishment deadline.
Does the SECURE Act Allow me to Open a Solo 401k for 2019 QUESTION:
Can I open a solo 401k for 2019 since the passage of the new Act?
ANSWER:
Unfortunately, no, but if you qualify for a solo 401k plan (e.g., you are self-employed, etc.) you can open a solo 401k plan in 2021 for 2020 as long as the solo 401k plan is opened by your business tax return due date including timely filed business tax return extension.
3 Comments
Thank you for this article.
I have a question regarding the deferral contribution deadline. Now that they allow more time to established the account, do they allow the contribution to be made by the same dateline?
While the 2019 SECURE Act extended the deadline to adopt a Solo 401k plan from the end of the year to the business tax return deadline including any timely filed extension, the IRS has not yet updated its prior guidelines currently stating that employee contributions must be elected by the end of the year. Therefore, if the solo 401k plan is opened in 2021, the conservative approach is to solely make the employer profit sharing contribution for 2020 not the employee contribution until the IRS issues final guidance. Ultimately, you and your tax preparer will need to determine whether or not to make employee contributions for tax year 2020 if the plan is opened in 2021.
Thank you Mark for the article and clarification regarding deadlines for employee contributions in contrast to employer contributions taking a conservative approach.
Has the IRS provided guidance on allowing the employee contributions (i.e., Roth, employee pretax, and voluntary after-tax) after 12/31/2021? Or, does the conservative guidance still hold and solo(k) contributions should be limited to only employer contributions after 12/31/2021?